Econ/Markets
Nice collection of charts from anonymous Bloomberg Macro Econ Chat user 85599
We’re Probably All Wrong About Interest Rates—Contra Blanchard
Recent research by Harvard professor Ken Rogoff questions whether rates will keep falling as the population ages. Real interest rates have been trending downward to near zero, especially since the financial crisis. But we can’t count on that trend continuing.
When guessing long-term rates, investors have been suffering both from recency bias and credulity about Fed guidance. That “strongly suggests” the current inversion “comes not from high recession odds or inflation normalisation,” but investors’ reluctance to adapt to the New New Normal, says Goldman:
“Investors appear to be wedded to the secular stagnation, low R* view of the world from the last cycle. We believe this cycle is different, with an economy that can support a higher long run real rate than currently assumed. [ . . . ] If the low R* view is correct, the Fed’s policy stance would indeed be substantively restrictive, and we will likely have a decidedly worse growth outcome than we currently anticipate. If, on the other hand, our economists’ baseline for a still robust economy comes to pass, it will be hard to argue that the Fed has been severely restrictive, and investors will likely update their long run rate priors, thereby moderating inversion to more ‘typical’ levels.”
Did energy prices cause this inflation surge?
You often hear that soaring energy prices, caused by supply-chain disruptions resulting from the pandemic and the war in Ukraine, caused the current inflation flare-up. A negative supply shock raises prices but – it is sometimes forgotten – when supply is restored, prices should fall back. In the data, consumer prices follow oil prices on the way up but not on the way down. This points towards inflation being high primarily because demand is high. Central banks, therefore, must be tough.
Both "Inflationistas" & "Recessionistas" see the economy in the dumpster in 2023!
No wonder there´s a generalized feeling of confusion. This confusion has even “brought together” monetarists and “Phillips Curvers” in their forecasts, with both predicting a (possibly deep) recession in the near future.
To people like Steve Hanke, who look only at money supply (even if at the “defective” measure of money), just like “too high” money growth spells inflation, negative money growth spells recession.
To be able to say more, I have to expand the framework to include, in addition to inflation, real output growth, but instead of considering them separately, I consider them together and call the sum of inflation and real output growth “Nominal Aggregate Spending” or NGDP growth.
With that we get the equation of exchange MV=PY or, in growth form m+v=p+y. To get the “Quantity Theory of Money” (QTM) the usual assumption is that V is “constant” (or v=0). But we have shown it isn´t.
I prefer to look at m+v=p+y as a “Thermostat” (see Friedman´s The Fed´s Thermostat). In this analogy, NGDP (p+y) is the “inside temperature” that the Fed strives to stabilize, by offsetting changes in v (the “outside temperature”) with changes in m.
Related: Barkin "barks" about the 1970s
most of the change in money growth reflects the Fed accommodating a shift in the real demand for money, and a smaller portion reflects an exogenous monetary policy that caused inflation to rise sharply and then fall back somewhat.
Here I’d like to focus on the shift in real money demand, which explains most of the pattern we observe in the graph. Why did the public wish to hold larger real cash balances in 2020 and 2021, and why has the real demand for cash balances fallen off somewhat in recent months?
The answer seems clear. Nominal interest rates plunged from 2.5% to zero during the Covid crisis of March 2020, and nominal interest rates rose sharply during 2022. The fall in nominal interest rates sharply increased the demand for real cash balances (although other factors such as stimulus checks might have also played a role.)
‘Sam? Are you there?!’ The bizarre and brutal final hours of FTX
When senior executives outside Bankman-Fried’s circle pored over spreadsheets, they reached a different conclusion. “It’s not liquidity. It’s fucking solvency. It’s a big, gaping hole in customer assets,” said one top executive, describing the realisation that money FTX promised to safeguard was missing. “It was such an unbelievable shock to the system,” said another former senior executive. As word spread, the leadership fractured into two opposing camps. The “Bahamas team” gathered around Bankman-Fried on the Caribbean island, as he frantically hit the phones, seeking investors. In New York, an opposing group began planning for the worst. Former employees called them “the adults.”
DIY multi-strategy hedge funds—possibly written by a mulitstrat hedge fund
However, it’s also easy to see how this can go catastrophically wrong.
Managing a DIY multistrat fund through SMAs must be phenomenally complicated, and require a level of sophisticated risk management and tactical capital allocation that’s beyond most institutional investors.
Multistrats also use a LOT of leverage to juice their returns, but this is managed and watched extremely closely centrally. There have long been concerns that one of the bigger firms — or second-tier multistrats desperate to look good but lacking the risk systems and discipline of a Citadel or Millennium — might screw up and cause havoc.
If a big institutional investor tries to do the same, well, then watch out.
Understanding the “Inconvenience” of U.S. Treasury Bonds
The emergence of the “negative swap spread” appears to suggest that Treasury bonds are “inconvenient,” at least relative to interest rate swaps. This post dives into this Treasury “inconvenience” premium and highlights the role of dealers’ balance sheet constraints in explaining it.
The Four Horsemen of the Tech Recession—The COVID Hangover, The Hardware Cycle, The End of Zero Interest Rates, and The ATT Recession.
I have been arguing for two years that Apple’s App Tracking Transparency (ATT) initiative was a big deal, and I may have been understating the impact.
Foreign
Luttwak—How Russia can end the war
Instead of more grinding frontal fights, Russian columns could advance straight down from Belarus into east-central Ukraine, towards Korosten and Zhytomyr to reach Vinnytsia, a part of the country that has seen no fighting, and where there are very few Ukrainian troops, and no obstacles in the flat terrain. In doing so, the Russians would cut off all the highways and railway lines that bring weapons, ammunition, and civilian supplies from Warsaw, Berlin, Prague and the West beyond them to Kyiv, Odesa and the entire south and east of the country, except for rare air freight.
But an operational-level victory that leaves the Russians astride Ukraine’s critical supply lines could open the way for the diplomatic solution. Yes, there is only one: the exchange of internationally-supervised plebiscites in Donetsk and Luhansk for Russian withdrawals from all other parts of the south and south-east, and of course an end to all fighting. From the first day, this was the only exit from the burning house of war, and so it still remains.
As for Ukraine’s refugees, the UN reports that 72% of adults who’ve gone are women under 60. A further 10% are men under 60. And the remaining 18% are people over 60. In the 18–34 age-group (the one crucial for family formation) over six times more women have left. So while the refugee crisis has slightly evened out the gender balance at older ages, it’s created an imbalance at younger ages: Ukraine now has a deficit of young and middle-aged women.
Big mafia vibes from Larry Summers here— “nice economy you got there, sure would be a shame if something happened to it.”
Related: The End of Israeli Democracy?
How Did the German Greens Become the Party of Warmongers?
German media has been oddly silent since investigative journalist Seymour Hersh’s article revealing that the US was behind the destruction of the Nord Stream pipelines.
What little coverage there is disparages the piece. Der Spiegel attacks Hersh’s credibility, calling him “controversial” and the report “poorly written” before warning it aids Russian propaganda. Die Welt focuses on the attention Hersh’s article is receiving in Russia and notes that Hersh “relies on a single source for his report. He published the report on his substack and not in a major US media outlet.” The newspaper does, however, admit at the tail end that the ongoing German investigation to find the true culprit has turned up no evidence of Russian involvement.
Culture/US
We live in an age swamped with information from a vast array of sources. It is convenient to be able to reduce the cognitive load from this information flood. That is most easily done through the provision of congenial ways to frame information.
Hence, there is great demand for media services that inform about happenings in ways that can be comfortably incorporated within a preferred set of in-group beliefs. This has created what philosopher Dan Williams rather nicely calls the marketplace for rationalisations. This facilitates the ability to rationalise beliefs one finds congenial to have—to buttress personal identity or to signal socially—for reasons other than their accuracy. The demand is for congenial, even protective, simulacra of informed reasoning.
The Story Construction Tells About America’s Economy Is Disturbing
Safteyism claims another victim.
A construction worker in 2020 produced less than a construction worker in 1970, at least according to the official statistics. Contrast that with the economy overall, where labor productivity rose by 290 percent between 1950 and 2020, or to the manufacturing sector, which saw a stunning ninefold increase in productivity.
Why publishers are such cowards
Why has publishing grown so doctrinally uniform and gutless? I’ll make a stab. Cowardice is contagious, courage rare. Most people are conformists, really, and hewing to a rigid set of progressive orthodoxies while shunning even faintly conservative writers has become the norm in this industry.
Following sporadically insightful deployment over the past several years, recent clumsy attempts to polemically deploy the term Gnosticism has now pushed the term into the chasm of parody. As long as the term remained rarified, it held rhetorical value combining mystique and complexity. But with increased saturation, these elements became liabilities. Gnosticism transformed from a signifier suggesting rare occult expertise into a signifier of empty rhetoric, if not deliberate obscurantism.
The reduction of powerfully stigmatizing labels to worthlessness through hyperinflation is a theme of the age. Nonetheless the fact that a concept is being mishandled doesn’t mean that it must be discarded. Concepts illuminate also in their abuse. The issue relates to the question that Gnosticism is intended to answer and the genuine difficulty in articulating it.
The FBI’s Most Controversial Surveillance Tool Is Under Threat
New details about the FBI’s failures to comply with restrictions on the use of foreign intelligence for domestic crimes have emerged at a perilous time for the US intelligence community. Section 702 of the Foreign Intelligence Surveillance Act (FISA), the so-called crown jewel of US intelligence, grants the government the ability to intercept the electronic communications of overseas targets who are unprotected by the Fourth Amendment.
That authority is set to expire at the end of the year. But errors in the FBI’s secondary use of the data—the investigation of crimes on US soil—are likely to inflame an already fierce debate over whether law enforcement agents can be trusted with such an invasive tool.
THE OVERLOOKED IRREGULAR WARFARE EXPERT THE PENTAGON SHOULD STUDY TODAY
In his 1961 book about warfare in Southeast Asia, Street Without Joy, Bernard Fall, the Howard University professor and former French Resistance fighter, explained, “A dead Special Forces sergeant is not spontaneously replaced by his own social environment. A dead revolutionary usually is.”
If “functional training” stayed in the PT clinic, I'd have no problem with it: if you want to waste time and money on Physical Therapy, go ahead. But when it replaces actual strength training in the school weight room and interferes with practice on the field, it costs athletes their potential for improved performance. Strength – the ability to produce force – is the basis of athletic performance, and practice is the basis of skill improvement. The side effects of strength improvement and practice are all the things “functional training” purports to produce, and is incapable of producing.